THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

WOLF BLITZER, CNN ANCHOR: Happening now, Bill Clinton retells what he called a fairly tale. He's trying to clarify a jab at Barack Obama. Is this damage control for his wife's campaign, or did he make matters worse? Brian Todd is watching the story. We're going to have a full report. That's coming up.

Also this hour, John McCain delivers a preemptive strike in South Carolina. He's trying to avoid a repeat of an ugly attack on him eight years ago.

Also, some eye-popping new evidence of McCain's New Hampshire bounce. There's a brand new CNN national poll. We're going to share it with you.

Also, President Bush covering some new ground in his push for Middle East peace. Will Arab allies warm up to his ideas on the Israel-Palestinian front or give him the cold shoulder?

We're going to Kuwait City momentarily.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

All that coming up, including President Clinton's latest remarks on an issue that's very, very sensitive out there. We'll have a full report momentarily.

But we want to begin right now with President Bush's Middle East tour. He's now in Kuwait. The first stop of a swing through five Arab nations. He's trying to rally support for his efforts to secure a peace treaty between the Israelis and the Palestinians before he leaves office.

Our White House correspondent, Ed Henry, is in Kuwait City right now. He's joining us live.

What is the president's message to these Arab allies, Ed?

ED HENRY, CNN WHITE HOUSE CORRESPONDENT: Well, there's three key messages, Wolf. And the first one, after spending three days in Israel, reaching out there, obviously, he wants to also show respect to Arab allies, and he wants to brief them on what he sees as some progress in moving forward with the Israeli/Palestinian peace effort and show them that this would be good for the region. Secondly, he wants to talk about Iran and show the Arab allies there's a commitment by the U.S. to make sure Iran does not get nuclear weapons and does not destabilize the region.

And third, the president also wants to tout some success on the ground in Iraq, reassure allies about that. And in fact, tomorrow he's getting a briefing from General David Petraeus, just about one year from the anniversary of the U.S. military surge -- Wolf.

BLITZER: His next stop, I take it, is Saudi Arabia. He's got some big announcements that he's going to be doing there.

What's on the agenda?

HENRY: That's right. The president's going to be giving the green light to a $20 billion arms deal with Saudi Arabia. In fact, officials are telling our State Department producer, Elise Labott, that it's likely to be announced Monday when the president is in Riyadh.

Now, there could be some opposition on Capitol Hill. Some allies of Israel are concerned that some of these weapons could be used against Israel, but, in fact, Israel has not really raised objections to this deal. And also, the fact is the U.S. is planning to give about $30 billion in military assistance to Israel.

So the White House feels they'll get this deal through -- Wolf.

BECK: And what about the president's follow-up? He has got a year left in office or so. He says he's going to be coming back to the region regularly, almost shuttle diplomacy for the White House.

What's going on?

HENRY: That's right. The president, in fact, today revealed that he'll be coming back to Israel. He's accepted an invitation to do that in May to celebrate the 60th anniversary of Israel.

But obviously, he also wants to get a read in the spring on whether or not there's any progress. Right now there's a lot of talk, obviously, a lot of optimism in the air. But the actual concessions on both sides have not been made yet. So he wants to come back in the spring.

But secondly, Secretary of State Condoleezza Rice made the point today to reporters there's not going to be any blinding flash in this trip or the next trip that all of a sudden, all of the stars are going to align. Obviously, they want to try to downplay expectations, but there's some truth in that statement as well in the fact that Secretary Rice is pointing out really the obvious, as you know, Wolf, that this is very, very difficult to try to get a peace deal of this magnitude. It's not going to happen overnight, so they have to show a lot of patience -- Wolf.

BLITZER: Ed Henry in Kuwait City, traveling with the president.

Thanks, Ed, very much.

Let's get to presidential politics right now. And arguably, at least some are suggesting, the new front-runner among the Republicans -- that would be John McCain -- he's beating back attempts by rivals to weaken his newfound strength. And right now McCain's campaign is in South Carolina.

Last night he survived attacks by Mitt Romney and others on stage at a Republican televised debate. McCain's campaign refuses to fall to those attacks and is mindful of what some are calling awful stunts from the past.

Our chief national correspondent, John King, is in Myrtle Beach, South Carolina -- John.

JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT: Wolf, it has always frustrated John McCain that he has just lukewarm relations with social conservatives despite what he believes is a consistent and solid voting record on the issues. Now a new effort to reach out to those conservatives here in South Carolina is stirring memories of an ugly controversy from campaign 2000.

(BEGIN VIDEOTAPE)

KING (voice over): It is first and foremost a reminder to South Carolina conservatives of a two-decade voting record opposing abortion -- the not just recently, always, without a doubt, a tweak at a key rival. To flip the glossy mailing over is to learn the story of Bridget McCain's adoption 15 years ago from an orphanage in Bangladesh.

As the mailing reached South Carolina homes this week, Cindy McCain recounted the story.

CINDY MCCAIN, WIFE OF SEN. JOHN MCCAIN: When a mother comes home with a new child and doesn't even tell him she's coming home with a new baby, and surprises him with a new baby from Bangladesh, and not only does he open his arms, but he loves her just like I do, that's something that says something about the character of a man.

KING: To the McCain campaign, an important piece of biography to voters who know McCain as a maverick senator and Vietnam war hero, but little about his family life.

SEN. LINDSEY GRAHAM (R), SOUTH CAROLINA: I think it's important for people to know that John has young kids. Kids in college. Kids in the military.

KING: But Bridget's emergence on the campaign trail, especially in a South Carolina mailing, also stirs memories of eight years ago.

GRAHAM: Quite frankly, in 2000 there were some pretty awful things said about the McCain family. KING: Among the attacks back then, election eve calls to South Carolina Republicans implying McCain had an illegitimate black child. McCain lost and was soon gone from the race. He was furious then, but says it's time to move on.

MCCAIN: What happened eight years ago is over, and I know that the people of South Carolina are not going to have such a thing happen again that happened then.

KING: This time, much of the South Carolina establishment is in the McCain camp, and Republican Governor Mark Sanford, who is neutral, says he hopes for a different closing tone than eight years ago.

GOV. MARK SANFORD (R), SOUTH CAROLINA: I think tragically, dirty tricks has been part of the equation in South Carolina. I've not seen it so far, and I hope that it doesn't show its ugly head here over the next week.

(END VIDEOTAPE)

KING: Senator McCain said the mailing was meant as a testament to his wife Cindy and to highlight his opposition to abortion and his support for adoption. But aides say if it also helps put to rest questions raised by dirty tricks eight years ago, fine by them -- Wolf.

BLITZER: John King reporting for us from South Carolina. John is going to be back with us in our 6:00 p.m. Eastern hour. He's going to have more of his interview with John McCain. That's coming up.

In the meantime, let's go to Jack Cafferty. He has got "The Cafferty File" in New York.

Hi, Jack.

JACK CAFFERTY, CNN ANCHOR: Wolf, some encouraging news coming out of Iraq these days, exactly one year since President Bush ordered those extra 30,000 troops in there as part of the so-called surge.

A U.S. general now says the country's western province of Anbar, which had been a hotbed for Sunni insurgents and al Qaeda, will be turned over to Iraqi control in March. He says it's time for the hand-over because levels of violence have dropped significantly and Iraqi security forces are now capable of taking over.

So far, nine out of 18 provinces are back under Iraqi control, and even though Anbar province will return to Iraqi control, U.S. forces will remain there as partners with Iraq's security forces.

There are some other positive signs as well. The number of U.S. casualties declining now for months. In December, in fact, 23 troops were killed there, U.S. troops, compared to a death toll of 112 a year ago in December of 2006.

That's not to say we're out of the woods, and of course every death is one too many. Nine U.S. troops lost their lives in just two days this week in Iraq.

There have been military successes, but progress on the Iraqi political front, well, that's virtually nonexistent. The progress being reported in Iraq may be responsible for this -- while an overwhelming majority of Americans remain opposed to the war, it is no longer the number one issue on people's minds. It's been replaced by the economy.

So here's our question. Has your opinion of the war in Iraq changed?

Go to cnn.com/caffertyfile. You can post a comment there on my new blog -- Wolf.

BLITZER: And I've got a blog, too, Jack. You know that.

CAFFERTY: Yes, I know that.

BLITZER: On the ticker at cnnpolitics.com. Go there, cnnpolitics.com, read the ticker. I think you'll be interested in today's. You'll let me know.

CAFFERTY: I'm going to check it out right now.

BLITZER: Excellent.

Jack, stand by.

Also, I just want to let our viewers know we're going to have an exclusive interview this Sunday with the defense minister of Iraq. He's here in Washington on this, the first anniversary of the so- called surge, the military surge. We'll have that interview with Abdel Qadr this Sunday on "LATE EDITION." "LATE EDITION," the last word in Sunday talk, 11:00 a.m. Eastern.

It's a wakeup call for Fred Thompson. Has the Republican presidential hopeful finally found his voice?

Plus, he's the native son, but can John Edwards be a winner in South Carolina? We're going to look closer at the Democrat's pitch and whether the state will be his last stand. We'll talk to experts who know what's going on.

And Bill Clinton revisits the so-called "fairy tale." Find out what he's saying now about a controversial claim he made earlier involving Barack Obama.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: John Edwards is hitting the road and pulling out the stops in South Carolina right now. He's vowing to carry on with his presidential race until the bitter end, but could his native state prove to be his last stop?

CNN's Dan Lothian is covering Edwards in South Carolina.

What does the Edwards camp say about the importance for John Edwards of this state, Dan?

DAN LOTHIAN, CNN CORRESPONDENT: Well, I spoke with aides with his campaign earlier today, and they told me that it's not make or break. They believe that he doesn't have to win, that he just has to be strong here in South Carolina. But frankly, this is a critical state after he came in second in Iowa and third in New Hampshire.

(BEGIN VIDEOTAPE)

JOHN EDWARDS (D), PRESIDENTIAL CANDIDATE: Thanks, guys. Good to see everybody

LOTHIAN (voice over): Former senator John Edwards is riding a bus across his native South Carolina and telling supporters that his roots give him a unique perspective on their struggles.

EDWARDS: You watch the mills close, the jobs leave. It's been devastating for middle class families. And it's something I take very personally because my grandparents worked in the mills, my dad worked in the mills right here in South Carolina. And I know what it means when the mill closes and the jobs leave.

LOTHIAN: At a town hall meeting in Summerville, Edwards promised to fight for the middle class, to help lift people out of poverty, and push for universal health care. Something that earned him the endorsement of a Clinton. Daryl (ph), that is. This Clinton describes himself as a staunch Republican, now putting party politics aside to support Edwards, the Democrat.

EDWARDS: And you're voting for me this time? OK.

And by the way, all the rest of you need to be telling your friends and neighbors you're looking at the candidate who can get Republican votes, including right here in South Carolina.

UNIDENTIFIED MALE: I think he's a good mainstream politician looking out for the middle guy.

LOTHIAN: Edwards won South Carolina in 2004 and is trying to recapture that glory and boost his campaign. Since finishing third in New Hampshire, he spent more time than any of his Democratic opponents in South Carolina, holding town hall meetings and visiting a food pantry. The former senator, who says he's in the race for the long haul, told me he's in good shape to compete here.

EDWARDS: We have plenty of money to run a serious campaign. And I think more important than that, I don't think voters are going to be controlled by money.

(END VIDEOTAPE)

LOTHIAN: And Edwards told me that he doesn't believe that the voters are paying any attention to the horse race, that they're focusing on what he stands for. And he feels that he is "optimistic about what will happen" -- Wolf.

BLITZER: Dan Lothian in South Carolina for us.

Thanks very much.

South Carolina is the backdrop for our next big Democratic presidential debate. CNN and the Congressional Black Caucus Institute are sponsoring the forum on Monday, January 21st, five days before South Carolina's Democratic primary.

Bill Clinton is trying to clear up some confusion, perhaps, about a provocative remark he made that was widely read to have been a tough shot at Barack Obama. The former president spoke out just a few moments ago, literally.

Brian Todd has been monitoring what he's saying.

And what is he saying, Brian?

BRIAN TODD, CNN CORRESPONDENT: Well, the operative word here, Wolf, that you just said is confusion. There's a lot of it going around. With the race so tight and the stakes so high between Hillary Clinton and Barack Obama, this back and forth between Bill Clinton and Obama's camp has taken on huge implications.

Now, just moments ago, as Wolf mentioned, on Reverend Al Sharpton's radio talk show, the former president said he never called Barack Obama's campaign a fairy tale. But he did not back down on what he claims was an assertion that the media's coverage of Obama's stance on the war was a fairy tale.

Here's what Mr. Clinton said just a few minutes ago.

(BEGIN AUDIO CLIP)

WILLIAM JEFFERSON CLINTON, FMR. PRESIDENT OF THE UNITED STATES: It disproves the argument that he was against it, and everybody else was wrong and he was right. So I said, "That's what those debates are fore, and how many of you knew those two facts?" in the audience. And I said -- so that story is a fairy tale, and that doesn't have anything to do with my respect for him as a person or as a political figure in this campaign.

He's put together a great campaign. It's clearly not a fairy tale.

(END AUDIO CLIP)

TODD: Now, let's look at that compared to what the former president said earlier this week. He claimed then that Obama's comment that he did not know -- that Obama did not know how he would have come down on the resolution to go to the Iraq war, was disingenuous because Mr. Clinton believed that Obama said in 2004 that there was no difference between Obama's position and President Bush's. This is what Mr. Clinton said earlier in the week.

(BEGIN VIDEO CLIP)

CLINTON: You said in 2004 you didn't know how you would have voted on the resolution. You said in 2004 there was no difference between you and George Bush on the war. And you took that speech you're now running on off your Web site in 2004. And there's no difference in your voting record and Hillary's ever since.

TODD: Since that time, all this week Barack Obama and his campaign have said that Mr. Clinton at that time mischaracterized Mr. Obama's position on the war. To clarify, the Obama camp says that he was always against the war, Mr. Obama has said that himself, and that he does not know for sure how he would have come down on that resolution to go to war. But from where he stood at the time, he would be leaning against it.

Now, on the assertion that Mr. Obama's position was no different from George Bush's, Mr. Obama did say that in 2004, but Obama's campaign says that when he said that, he meant that at the time this was in regard to supporting the troops and not wanting to pull them out of Iraq at the time.

So, Wolf, a lot of confusion here. And I just talked to someone in Obama's campaign on Mr. Clinton's remarks just a moment ago. They say that he's saying the same misleading things, that he's distorting Mr. Obama's record in truncated quotes. So I'm sure we're going to be hearing back and forth from here to come.

BLITZER: And we're going to get some analysis of what all of this means politically. Donna Brazile and Carl Bernstein, they're going to be joining us in our next hour to assess this latest feud between the Clinton campaign and the Obama campaign.

Thanks very much, Brian, for that.

And as our viewers know, Brian Todd and Dan Lothian are both part of the Emmy Award-winning best political team on television. Remember, for the latest political news any time, go to cnnpolitics.com.

In the Republican race, Rudy Giuliani's campaign is suffering from a cash crunch. CNN has learned that top Giuliani staffers have been asked to work without pay this month and maybe even longer. Sources say the campaign is harnessing its resources for the Florida primary, where Giuliani is putting his campaign on the line. Giuliani is stumping there today.

(BEGIN VIDEO CLIP)

RUDY GIULIANI (R), PRESIDENTIAL CANDIDATE: There's only 18 days until your big primary here in Florida. And we want to make sure that Florida counts.

You can make sure Florida counts by voting in the primary. And I think I know who you should vote for. Me.

(APPLAUSE)

(END VIDEO CLIP)

BLITZER: Giuliani's money crunch is a sign the one-time front- runner's campaign may be struggling after a dismal showing in Iowa and New Hampshire, where Giuliani put in minimal money and effort. Giuliani's money in the bank began to dwindle in September. The campaign reports its cash on hand was down to over $12 million at the end of last year. Seven million of those dollars can be spent during this primary season.

Coming up, we're going to tell you where Giuliani stands right now in our new national GOP presidential poll. And we're going to be speaking to a Giuliani adviser about this campaign finance crunch.

All that coming up.

Also coming up, it almost led to a shootout between Iran and the U.S. Navy. Has there been anything like this before? We'll have the latest on the tensions between Washington and Tehran.

And Mitt Romney is appealing for conservative votes. So why are some liberals promoting the Republican? You're going to find out why.

That and a lot more coming up right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

(NEWSBREAK)

(COMMERCIAL BREAK)

BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now, the nation's biggest bank is rescuing the nation's largest mortgage lender facing financial crisis. But what might happen for your home mortgage?

We're on top of this story.

The government delays a plan that will affect all of our drivers' licenses. While some argue the delay could benefit terrorists, others say moving ahead with the plan could put your personal privacy at risk.

And she's Europe's first female to sacrifice herself to kill U.S. troops. Now the terror cell that groomed her for that deadly act sees justice.

I'm Wolf Blitzer. You're in THE SITUATION ROOM. Right now many people believe that after some surprising results in Iowa and New Hampshire's contests, the race for the White House is very different. And we have fresh poll numbers gauging how true that is. Our latest snapshot in this campaign.

Our senior political analyst, Bill Schneider, is standing by with more on what's going on.

All right. First of all, why should we be paying attention to these latest poll numbers -- this is the first national poll really that's been done since New Hampshire -- given the sort of dismal record going into New Hampshire.

WILLIAM SCHNEIDER, CNN SR. POLITICAL ANALYST: Well, Wolf, the political Super Bowl is in a few weeks, on February 5th, and that's the day most of the country is going to be voting. So what the national audience thinks will be decisive.

(BEGIN VIDEOTAPE)

SEN. BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: Thank you.

SCHNEIDER (voice over): One for Obama.

OBAMA: Thank you, Iowa.

SCHNEIDER: One for Clinton.

SEN. HILLARY RODHAM CLINTON (D-NY), PRESIDENTIAL CANDIDATE: Let's give America the kind of comeback that New Hampshire has just given me.

(APPLAUSE)

SCHNEIDER: Both winners gained support among Democrats nationally. Obama, six points. Clinton, nine. Edwards won nothing and got nothing.

Clinton has reestablished herself as the Democratic front-runner, especially among Democratic women. Since New Hampshire, the gender gap among Democrats has become gigantic.

In the Republican race, there was one for Huckabee...

MIKE HUCKABEE (R), PRESIDENTIAL CANDIDATE: I love Iowa a whole lot.

SCHNEIDER: ... and one for McCain.

SEN. JOHN MCCAIN (R), ARIZONA: But tonight we sure showed them what a comeback looks like.

SCHNEIDER : But only McCain gained support among Republicans nationally. McCain is now the clear Republican front-runner, with Huckabee second.

Where's Rudy? He's waiting in the weeds. Make that the swamps of Florida. Meanwhile, he's draining support.

The campaign has another front-runner. The economy is now the front-running issue, rising above the war in Iraq, among Democrats, as well as Republicans, just in time for the Michigan primary.

MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: How Michigan is doing, how the manufacturing sector, how the domestic auto manufacturing sector is doing, really is a pretty good bellwether of what the future holds for this country.

SCHNEIDER: That's not good news. Michigan's economy is reeling from job losses. And the number of Americans who believe the whole country is in recession now exceeds 60 percent.

(END VIDEOTAPE)

SCHNEIDER: Michigan is natural territory for Mitt Romney. He was born there. His father was governor. And, as a former business executive, he should have economic credibility. Now, Romney is depending on Michigan to make him the comeback kid, which would be the third one in this campaign, by my count -- Wolf.

BLITZER: Bill Schneider, with the latest numbers and analysis for us, thank you.

We're joined now by an adviser to the Giuliani campaign. Bill Paxon is a former U.S. congressman from my hometown of Buffalo, New York.

Congressman, thanks for coming in.

BILL PAXON, GIULIANI CAMPAIGN ADVISER: It's good to be with you.

BLITZER: Always good to have you here.

All right, the pay cuts -- we're going to get the poll numbers shortly -- why is the Giuliani campaign asking top staffers not to get their salaries this month?

PAXON: Well, the top staffers stepped forward and said, we want to put more commitment into the state of Florida, into the final weeks of this campaign, as we move to where we have said for a year is going to be important for us.

And the campaign has sufficient resources, has $12 million cash on hand, more than enough money to carry out our game plan. And now people are willing to come forward. Many of us have volunteered for a year...

BLITZER: So...

PAXON: ... never been paid. And I think it's great that some of the senior staff came forward and said, we want to help.

BLITZER: Well, did they come forward, or were they asked to come forward? PAXON: No, they came forward. And they volunteered. And it's terrific. And it's another sign of commitment. It's the reason that I believe very solidly we're going to win.

BLITZER: How many staffers -- how many staffers are actually now deciding to forego their salaries this month?

PAXON: I don't have the number in front of me.

(CROSSTALK)

BLITZER: I mean, are you talking significant money savings?

(CROSSTALK)

PAXON: Oh, I think there is, oh, yes, some real dollars there.

And the dollars that go on top of the money that is set aside for Florida, we have said for a year this is where we're going to fight a big battle, and, by the way, at a time that the mayor is making great traction. You go to Florida, the economy is the number-one issue. We put forward a plan, the mayor did, $6 trillion worth of tax cuts to spur further economic growth.

Today, he put on the table a plan to help deal with the catastrophic insurance crisis in Florida. Governor Crist was lauding it today. I think we're right on target financially and in terms of policy.

(CROSSTALK)

BLITZER: Mitt Romney is pumping a lot of his own, millions of dollars, into his campaign.

(CROSSTALK)

(LAUGHTER)

PAXON: Right.

BLITZER: Rudy Giuliani has made a ton of money since leaving the mayoral slot, leaving New York City's mayor job.

PAXON: Yes.

BLITZER: Is Rudy Giuliani going to start pumping personal money into the campaign?

(CROSSTALK)

PAXON: First of all, not anywhere near the money that Governor Romney has made.

(CROSSTALK)

BLITZER: But he's millions, made millions and millions of dollars.

(CROSSTALK)

BLITZER: And he's made a commitment for the past year. He's traveled across this country. He's raised an enormous amount of money. He and his wife have gone all over, worked, worked hard.

They have made a commitment. The staff has made a commitment. The volunteers have made a commitment. And we're going to do very well.

BLITZER: Well, so what is the answer? Is he putting his own personal money in?

PAXON: He's already made a huge commitment to this campaign.

BLITZER: Financial commitment?

PAXON: He has already -- he has taken a year off from work. He's put himself out there and, I think, done a great job.

BLITZER: But has he actually made financial cuts, like Giuliani -- like Romney has?

(CROSSTALK)

PAXON: Nobody -- I don't think there is anybody out who can write checks like Governor Romney, but it hasn't done him any good. On the other hand, our campaign is doing very well and I think is going to continue to do well.

BLITZER: In the poll that we just heard Bill Schneider report on, it was almost a flip of the situation from a few months ago.

PAXON: Right.

BLITZER: When Giuliani was the national front-runner, McCain was in deep trouble. Now the two of them seem to have traded places.

McCain seems to be the front-runner nationally in this brand-new poll. Giuliani has slipped dramatically. What is going on?

PAXON: You know, again, go back. Our plan, from last January, was real clear. We would go to the state of Florida. And, then, the week later, when the big primaries were coming up, on February 5, we would be in play. And we are.

If you look at the polling in New York, in New Jersey, in Connecticut, in California, a lot of states where it really matters, where those primaries are going to be held on February 5, the -- Mayor Giuliani is doing tremendously well, because his stands are right on the issues.

(CROSSTALK)

BLITZER: I always thought that New Hampshire was almost tailor- made for a moderate Republican, like Rudy Giuliani. And, yet, he failed miserably there.

PAXON: Well, I don't think he failed miserably. I think we got our message out. And we have been around the country campaigning.

But he has been running a campaign all over the country that allows him to pivot and move with the terrain. And I think we are going to see, when he goes to Florida, where he's tremendously well- received, where more electoral votes will be -- or more convention votes will be in play...

BLITZER: Delegates.

PAXON: ... delegate votes will be in play than in all these states combined coming up to it.

(CROSSTALK)

PAXON: I think you are going to see a great change in where the direction of the campaign...

(CROSSTALK)

BLITZER: So, if he wins in Florida -- he's got to win in Florida; is that what you're saying?

PAXON: I think he's going to do very well.

BLITZER: In our latest poll, we asked registered Republicans nationwide their view if Giuliani wins the Republican nomination; 21 percent said they would be enthusiastic; 49 percent said they would be satisfied; 21 percent said they would be dissatisfied. Eight percent said they would be upset.

PAXON: Sure.

BLITZER: Twenty-nine percent, almost a third...

PAXON: Sure.

BLITZER: ... of registered Republicans, would not be very happy if Giuliani gets the nomination.

And so let's try to hone in why. Is it because of his position on abortion rights, gay rights, gun control?

(CROSSTALK)

BLITZER: Why do think?

PAXON: First of all, I would like to see those numbers for the other candidates, because, after bruising primary battles, you're going to have some people who are going to need to be...

Number two, Rudy Giuliani has been well-received. You look at the poll numbers in a lot of these states, the most conservative voters -- and I was one of the most conservative members of Congress -- are still very enthusiastic about Rudy Giuliani, because they believe he has the Reaganesque message. And I think, having been the only candidate for president in our party who worked for Ronald Reagan, he understands what our voters, conservative or otherwise, want and need.

BLITZER: Bill Paxon, who went to St. Joe's High School in Buffalo, New York...

(LAUGHTER)

BLITZER: I went to Kenmore West...

PAXON: Right around the corner.

BLITZER: ... right in the suburbs.

Thanks for coming in.

PAXON: Thank you very much.

BLITZER: Us fellow Buffalonians, we have got to stick together.

PAXON: We stick together.

(LAUGHTER)

BLITZER: Fred Thompson is throwing some sharp elbows. The Republican presidential candidate is out with some fresh attacks against his rivals, especially one he views as a direct threat to his chance of winning in the South.

And Bill Clinton, something he said about Barack Obama sparking some controversy. Now the former president trying to clear it up. We will talk about that in our "Strategy Session."

And are thousands of people living near one nuclear power plant in potential danger? That's what some people are asking after guards who protect the plant were caught on tape apparently sleeping. We have got the videotape. We will show it to you.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: The presidential candidates are, for the most part, zeroing in on the three states that hold the next round of contests. Mitt Romney and Mike Huckabee are campaigning in Michigan before Tuesday's primary. John McCain and Fred Thompson are in South Carolina eight days before the GOP primary there. John Edwards is there as well. He's appealing for votes in the Democrats' January 26 primary. Rudy Giuliani is pressing on with his big push in Florida's primary near the end of the month. And Hillary Clinton is out in California, one of more than 20 states holding contests on Super Tuesday. That would -- that would be February 5.

Something appears to have happened to Fred Thompson in South Carolina. He's suddenly coming out swinging in a state considered crucial to the future of his campaign. One opponent suggests Thompson is finally waking up.

Our Dana Bash is covering the Thompson campaign in South Carolina -- Dana.

DANA BASH, CNN CONGRESSIONAL CORRESPONDENT: Wolf, Fred Thompson was supposed to be the great hope for conservatives frustrated with the GOP field. That didn't happen. Now Thompson is pinning his hopes here, on South Carolina, and taking aim at the candidate most in his way.

(BEGIN VIDEOTAPE)

FRED THOMPSON, REPUBLICAN PRESIDENTIAL CANDIDATE: He would be a Christian leader, but he would also bring about liberal economic policies, liberal foreign policies.

BASH (voice-over): Hey, Mike Huckabee, take that.

THOMPSON: He believes we have an arrogant foreign policy, in the tradition of blame America first.

BASH: And that.

THOMPSON: He believes in taxpayer-funded programs for illegals, as he did in -- in -- in Arkansas.

BASH: And that. Suddenly, the man whose campaign has faltered from lack of energy perked up with a rapid-fire attack.

Huckabee's take?

MIKE HUCKABEE (R), PRESIDENTIAL CANDIDATE: And, you know, Fred is finally waking up and kind of realizing there is a race going on. But, after eight years in the Senate, I guess he has nothing to show for it, other than he attended some meetings and cast some votes, made a few trips and became a Washington lobbyist.

BASH: The reality? Huckabee has stolen Fred Thompson's conservative son of the South thunder. And, after Thompson's abysmal showing in Iowa, he skipped campaigning in New Hampshire and focused all his efforts in South Carolina.

Thompson advisers liken it to General George Custer's land stand.

(on camera): Is Thompson going Custer? Is this Custer's land stand for you? THOMPSON: Oh, Custer's last stand. No. It didn't work out too well for Custer.

BASH: It didn't.

THOMPSON: No. No. I am going to -- I have got another model that I'm going to follow.

BASH: And what is that?

THOMPSON: Wellington at Waterloo.

BASH (voice-over): History buffs recall the Duke of Wellington defeated Napoleon at Waterloo.

THOMPSON: They may be deciding my fate and they may be deciding, in my opinion, the fate of the Republican Party. It's in the hands of the South Carolinians and the good lord, as far as I'm concerned. And I feel perfectly comfortable with that.

(END VIDEOTAPE)

BASH: In many ways, Fred Thompson stole the show here in Myrtle Beach, delivering the kind of one-liners the actor's supporters wished they had heard a long time ago. The question now is whether it's too late -- Wolf.

BLITZER: Dana, thanks very much -- Dana Bash reporting.

There's a new Republican front-runner, at least according to the new CNN/Opinion Research Corporation poll. John McCain enjoys a new bounce from New Hampshire. But will his position on the key issues in South Carolina and Michigan knock him down a peg? We're watching.

And, on the Democratic side, Hillary Clinton builds on her national lead, but will South Carolina voters bring her back to the pack? Peter Fenn, Leslie Sanchez, they are standing by for our "Strategy Session."

That's coming up next -- right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: With the first two big presidential contests now decided, we have some fresh new poll numbers on who might have received an actual bounce. The poll shows Hillary Clinton and John McCain are now clear front-runners.

Leslie, let me start with you, because McCain has really emerged nationally, almost flip-flopping with Giuliani. He's where Giuliani was a few months ago, and Giuliani is now down where McCain was. What do you think about what's going on nationally among registered Republicans?

LESLIE SANCHEZ, REPUBLICAN STRATEGIST: Well, I think one thing we all learned from New Hampshire is, you can't put a lot of faith or all your faith in polls.

(CROSSTALK)

BLITZER: That's a good point.

SANCHEZ: OK. People are voting.

BLITZER: This is a little snapshot...

(LAUGHTER)

BLITZER: ... of where the country seems to be right now.

SANCHEZ: Today, right this second.

BLITZER: It doesn't mean it's hold next week...

SANCHEZ: Exactly.

BLITZER: ... or the week after. But this is a snapshot.

SANCHEZ: Exactly.

But it also shows there's a lot of volatility on the Republican side, that you have a lot of independent voters -- or independent conservatives who are still trying to make up their mind on who they feel most comfortable with. No doubt John McCain has tremendous momentum.

But, you know, if anything we learned, we learned that -- that people will make their mind up late, which tends not to happen. We're seeing people make it in the last hour, decide who they're going to vote for. And people are really relying on the next couple of primaries to see who is going to come out on top.

BLITZER: Now, I just want to remind our viewers that we did this poll after the results were -- were tallied in New Hampshire.

PETER FENN, DEMOCRATIC STRATEGIST: Right.

BLITZER: So, this is relatively fresh.

What do you think about it?

FENN: Well, I will tell you, I think there's no question that Giuliani is in trouble. I mean, he's gone from first to third. McCain has gone from fourth in your polls to first.

But, more important, if you look at what's going on in Florida, the make-or-break state for Giuliani, he has slipped to a virtual tie with the other three folks. The big bounce has -- has gone to McCain. He's first, 27, 19, 17, 27. Now, if he can't win down there, he's dead.

BLITZER: Go ahead.

SANCHEZ: Well, you know, what's interesting, Michigan on the Republican side being the next race, and that state is so interesting, because you have got a third of the voters -- or, if you broke it in parts...

BLITZER: Among Republicans.

(CROSSTALK)

SANCHEZ: ... among Republicans, a very strong evangelical community. You have a -- that's more for Huckabee, a rural community kind of outside of the city area that is for John McCain, more independent thinkers, and then the city urban area that's more of a Romney territory.

And they're -- and they're going to divide that -- that vote up.

(CROSSTALK)

BLITZER: The suburban areas might -- might be going for Romney.

FENN: And that is very close.

(CROSSTALK)

FENN: It's 23 -- I think 23, 20, 18 right now. The three of them are...

(CROSSTALK)

BLITZER: What do you think of the Democratic side of this? Because Hillary Clinton seems to have solidified that national lead among registered Democrats.

FENN: Yes, she's done very well nationally, Wolf. And she's clearly in trouble in Nevada and clearly in trouble in South Carolina. Both those states are going to be very tough for her.

So, she's got to play to February 5. She's got to look -- she's got to leapfrog to February 5.

(CROSSTALK)

BLITZER: She's got to pull a Giuliani, in other words.

(LAUGHTER)

FENN: She's got to go to February 5.

SANCHEZ: Very much so.

And I think some of her statements today she made on immigration shows that she's really tone-deaf on that issue. You know, she was talking about dealing with immigration as like -- it's like -- is not like looking at it like guacamole and salsa. I mean, I just don't know where she gets her advice on this issue, but she's going to have to get up to speed.

BLITZER: What do you think of this latest decision by her husband, the former president, to go on Al Sharpton's radio show earlier today to try to clarify his remarks about Barack Obama's campaign and a fairy tale?

Let me play a little clip.

FENN: Sure.

BLITZER: Listen.

(BEGIN AUDIO CLIP)

BILL CLINTON, FORMER PRESIDENT OF THE UNITED STATES: Well, I stand by what I said. But the reports that I claimed his campaign or that he personally or that in any way was disrespectful and said they were a fairy tale, that's just not true.

(END AUDIO CLIP)

FENN: I will tell you, I think he does a lot better being the supporter in chief, not the attacker in chief, Wolf.

I mean, you know, when he gets out and gets involved in the controversy, it just -- it's trouble. And...

BLITZER: It hurts his wife, you think?

FENN: Yes, I do. I think, look, if she wants to make contrasts with Barack Obama, fine. He says, look, I'm a Chicago pol. I play this hardball, too. But it should be a contrast that -- she's the one that's running, not him. And she should make the contrasts, not him.

SANCHEZ: I'm sure they're thinking, now that they're gone to the arbiter, being Al Sharpton, of all things racial, that this will just go away. But that's clearly not going to be the case.

(CROSSTALK)

BLITZER: It has the immediate impact of us talking about it right now. If Bill Clinton had not gone on Al Sharpton's radio show to raise this whole issue of the -- quote -- "fairy tale," we wouldn't be talking about this issue. So, she makes a fair point.

(CROSSTALK)

FENN: Absolutely.

SANCHEZ: And it's true.

And I think a lot of people wanted in this race to move away from the sexist issue and from the racial issue. And I think we're right back in the middle of both.

FENN: Yes, I hope not. I think that was the reason -- you're right -- that he went on this show, was to try to back off on it.

And I think, look, we're going into South Carolina. There's going to be this talk. But the worst thing that both campaigns can do is engage -- you're right -- in racial talk.

BLITZER: Tell my why you think Hillary Clinton is in trouble in Nevada and South Carolina?

FENN: Well, Nevada, the unions have enforced Obama. They're huge. They control all the workers in the casinos. And I think that makes it tough for her.

South Carolina is a three-way split. You have got Edwards, who looks like he is going to hang in. He's going to take some votes. I do think there's no question that the excitement that Obama has created has spread to South Carolina in the black community.

Initially, when -- way back last spring, she was beating Obama in the black community. That is not going to happen. I mean, he is going to do very well there. Fifty percent of the vote is going to be African-American. But I think you run a straight-out campaign. And, as I said, I think they're looking to February 5. I think they're -- I mean, they're not conceding anything, but they're looking to February 5.

BLITZER: All right.

SANCHEZ: No, very true. And I think it's interesting that Barack Obama sent his wife there ahead of time.

BLITZER: Michelle.

SANCHEZ: Very much. Michelle has tremendous charisma. She's going to be appealing to a lot of female -- not only female voters, but undecided voters. And that's a very powerful combination.

BLITZER: In the presidential race, there's a long way to go before the general election, but one candidate already wants a vote recount. We are going to tell you who that is and why.

And Mitt Romney is positioning himself as a conservative choice for president. So, why are some liberals telling Democrats to vote for him?

And all our driver's licenses will be affected with the enactment of a controversial plan. Today, the federal government is saying when that might happen, but some say it could put your personal privacy at risk.

Stick around. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Checking our Political Ticker: Democratic presidential candidate Dennis Kucinich is calling for a recount in the New Hampshire primary.

The Ohio congressman contends there are questions about the integrity of the vote. Kucinich got just 2 percent in the primary. The New Hampshire secretary of state says he's confident the results are accurate. But he says Kucinich can get his recount, if he pays for it.

CNN confirms Arizona's most prominent Democrat, the governor, Janet Napolitano, is endorsing Barack Obama for president. Napolitano is expected to campaign with Obama this weekend in neighboring Nevada. Her support could help Obama in next week's Nevada caucuses and in the Arizona primary on Super Tuesday, particularly among women voters.

Republican Mitt Romney is launching a new ad in Michigan today playing up his ties to the state. Romney grew up in Michigan, where his father served as governor. In the ad, Romney pledges to turn around Michigan's troubled economy. After losses in Iowa and New Hampshire, Michigan is seen as a critical battleground for Romney.

In Michigan, Mitt Romney once again is dramatically outspending his rivals on TV ads. CNN's consultant on ad spending reports, Romney spent more than $2 million on ads in Michigan so far this year. Rivals Mike Huckabee and John McCain together spent only about $400,000 on Michigan ads so far.

Remember, for the latest political news at any time, check out our ticker at CNNPolitics.com. You can check out my blog there as well. Popular liberal the Daily Kos, a site that receives hundreds of thousands of visits each day, is rallying its readers to vote for Republican -- yes, Republican presidential candidate Mitt Romney in the upcoming Michigan primary.

Let's go to our Internet reporter, Abbi Tatton, to tell us what this is all about.

What is it all about?

ABBI TATTON, CNN INTERNET REPORTER: Wolf, I think we all scratched our heads a little when we first saw this.

But here's the justification from Markos Moulitsas, who runs the site Daily Kos. The Michigan Democratic primary means little, because they have been stripped of delegates. Not so for the Republican, where it's important, especially for Mitt Romney, who needs a win there for his campaign to stay afloat. So, says Kos, vote for Romney in the Michigan primary, because, if Romney stays in the race, this is more time that the Republican nominating process will go on for.

That's more time and money that they will spend attacking each other, rather than attacking the Democrats. Got all that? Well, there's a Facebook page promoting the effort. And there are e-mails that Kos wants to people to send out to people in Michigan. It's been met with mixed reactions online. But, whatever you call the tactic, it's legal, because Michigan has an open primary.

We spoke to the Romney campaign about this today. A spokesman called it odd, and he says that Mitt Romney hopes to win, plans to win Michigan with Republican voters. Mike Huckabee was also asked about this today from CNN, and he responded, "Democrats should vote for me" -- Wolf.

BLITZER: The Daily Kos speaking out.

All right, thanks very much, Abbi, for that.

Let's have somebody else speaking out right now. That would be Jack Cafferty with "The Cafferty File" -- Jack.

CAFFERTY: Clever rejoinder for a candidate in a race to say, you should vote for me.

(LAUGHTER)

CAFFERTY: Snappy patter.

The question this hour: Has your opinion of the war in Iraq changed amid the -- the increasing number of reports of some kind of progress over there since the troop surge?

Serena writes: "There were more troops killed in Iraq last year than any other. One blip and things are suddenly better due to the troop surge? How gullible do you think we are? The whole war has been smoke and mirrors except for the steady flow of dead and wounded. And the Iraqi people are slowly being executed along the way."

Dot writes: "My opinion has not changed one iota. The war was unnecessary, empiricist, immoral, ill-conceived and ill-implemented. If the do-nothing Congress can't bring themselves to impeach this president and vice president, then I hope someone will have the guts to bring criminal charges for crimes against humanity and crimes against citizens of the United States."

William writes: "No, my mind has not changed on Iraq. I was against it from the start, still am. We were led into this war through lies and deceit. No matter how well the war may be going, that doesn't make it right, just or moral."

Garrick in Atlanta, Georgia: "At the end of the day, the Iraqis are not going to live and play nicely with one another, whether U.S. troops are there or not. I'm still disheartened that Americans are giving their lives for a cause that Iraqis do not even embrace. It's disgraceful. Each additional day U.S. combat troops are in Iraq, I become more disappointed in the leadership in Washington."

And George writes from Kansas City, Missouri: "No. The Iraq war and our economic state are most definitely linked. If we are spending one trillion dollars on a war we don't need to fight, that's poor economics, plain and simple" -- Wolf.

BLITZER: Jack, thanks very much for that -- Jack Cafferty with "The Cafferty File."

And, to our viewers, you're in THE SITUATION ROOM.

Happening now: The 9/11 hijackers used driver's licenses to board airliners and strike at the heart of America. Authorities will make licenses more secure, they say, but it could take years. In the end, though, will that make you any safer? We're on top of this story.

Security guards caught on camera apparently dozing off, instead of protecting a nuclear plant, where a breach of security could affect hundreds of thousands of lives. We have got the video. We will share it with you.

And Bill Clinton just added a new ending to what he called Barack Obama's fairy tale. Did he clear up the confusion, or did he make things worse?

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

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